Most Read Contributor in New Zealand, September 2016
On 2 August the Supreme Court granted the taxpayers leave to
appeal the Court of Appeal's majority decision in
Commissioner of Inland Revenue v Penny and Hooper (2010)
24 NZTC 24,287.
The high-profile tax avoidance case involves two orthopaedic
surgeons who carried on their practices through companies and
trusts, while paying themselves a below-market salary. The
Commissioner of Inland Revenue argues that the surgeons'
arrangements breach the general anti-avoidance rule (GAAR)
in the Income Tax Act 2007. The majority of the Court of
Given the Commissioner's recent winning streak in tax
avoidance cases, practitioners and taxpayers alike will await the
Supreme Court's judgment with bated breath, hoping that the
Supreme Court will shed some light on where the boundary lies
between legitimate tax planning and impermissible tax
Commissioner's recent successes
If tax planning was a game, pitting the might of the
Commissioner of Inland Revenue against the ingenuity of taxpayers,
then Associate Judge Bell aptly summarised the current score in his
9 July judgment:
"...the tide is running
strongly in favour of the Commissioner of Inland Revenue on tax
In fact, the current score in tax avoidance cases is running 10
– 1 in favour of the Commissioner.
Empowered by the favourable Supreme Court judgment in the high
profile forestry tax avoidance case Ben Nevis v
CIR2, the IRD has gone on to take and win a number
of tax avoidance cases involving arrangements previously regarded
by many taxpayers as 'kosher'.
Such arrangements included:
the structured finance transactions undertaken by NZ's
major trading banks
the use of companies and trusts by professionals (such as
doctors) to run their practices
the treatment of current account drawings by the shareholder of
a closely held company as a loan, and
loss attributing qualifying companies renting properties to
In our view, a sea-change in the judicial attitude towards tax
avoidance is emerging from the case law, and potentially a shift in
the boundary line between legitimate tax planning and impermissible
This puts taxpayers in an uncertain position when planning their
affairs. What is acceptable use of the Income Tax Act and
what is outside the 'contemplation of Parliament'?
Taxpayers' pleas for greater certainty in this area have fallen
on deaf ears, with the Supreme Court stating that "Parliament
has left the general anti-avoidance provision deliberately
What does this mean for you?
As a result of the IRD's recent success, we can expect more
audit activity, especially (the IRD warns) in the property
We can also expect to see the IRD rely more readily on the GAAR
when challenging arrangements which offer tax benefits or simply
contain features which the IRD does not like (e.g. a below-market
The IRD may also be more likely to engage taxpayers in the
dispute resolution process, knowing that there is a sympathetic
court to hear the case at the end of the IRD's internal
Looking forward, taxpayers need to be aware that the boundary
lines in tax avoidance have shifted.
To protect yourself from long and costly disputes with the IRD
(not to mention the possibility of 100% penalties) we recommend
seek tax advice before entering into transactions
in appropriate cases, seek a binding ruling from the IRD if
there is a risk that your transaction could be subject to the GAAR,
watch out for the IRD's "Revenue Alerts" which
identify tax avoidance arrangements that the IRD has identified and
is actively targeting.
If you are presented with an arrangement with tax benefits which
seem too good to be true, they probably are!
How can we help you?
If you would like to know more about the issues discussed above,
please contact our experts to the right or register for our
upcoming Hothouse seminar: Tax Avoidance: "Parliamentary
contemplation" a.k.a the judicial sniff test?Please
click here for details.
Our thanks to Jess Cameron for writing this Brief
1. DT United Kingdom Ltd v C of IR HC
CIV-2009-4040-005580, 9 July 2010
2. Ben Nevis v CIR (2009) 24 NZTC
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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